People first Promoting Growth One Person at a Time

The German government needs to wake from its contented economic slumber and urgently move to secure future growth by promoting individual productivity.
Promoting people power is of prime importance.

The German legislature has for some time been surfing a wave of economic well-being as a result of the country's quick and brilliant comeback as a business location, its surprising turnaround from the deep recession of 2009 and strong employment growth. Sadly, it has also suppressed the idea that producing comes before distribution.

This is demonstarted by the adoption of very expensive anti-job and growth projects such as retirement at 63 and benefits for caring for children at home. The introduction of a nation-wide minimum wage next year, which at €8.50 ($10.65) an hour is too high for eastern Germany, is another example. Yet the need to loosen the brakes on growth applied to the development of the population is much more urgent.

For decades, the growth of hourly productivity has been falling - from 3.8 percent in the 1970s to 1.1 percent in the last decade - and there is no indication of a turnaround. If the government fails to take action, the growth potential will decrease by a further 0.3 percent in the next three decades because of the significant shrinking of the productive core of our population.

This decline could be reduced by an immigration policy orientated to the needs of the labor market, and an incremental increase of the retirement age to 69 by the year 2030. Neither, however, can be a substitute for a modernization and expansion of our economy's real capital stock (assets that produce goods), accompanied by a bundled education and family policy measure to mobilize human capital reserves.

It is indisputable that our infrastructure, once world-leading, needs to be modernized and systematically expanded, especially in the former East German states.

It is indisputable that our infrastructure, once world-leading, needs to be modernized and systematically expanded.

A more controversial subject is whether we need to modernize and expand our commercial capital stock. While the German Institute for Economic Research (DIW), an independent think tank, has determined a significant shortfall in investments, the German Council of Economic Experts, a panel of government advisers, said recently that it sees "no indication of a pathological finding" in the low rate of investment.

This apparent contradiction can be explained if one considers that in a commercial investment calculation only individual company goals and expected returns are taken into account, and not the needs of the overall economy.

This is why it is possible for an investment activity to be ideal from a business point of view but insufficient from an overall economic growth perspective. That would mean that there is no argument against a modernization of infrastructure and a growth-friendly economic policy to stimulate private investment, as is presented in a joint report by the DIW and the Hagen Resources International (HRI).

The need to more readily exploit educational reserves is just as important as improving the real capital stock. This means that all-day schooling should become the norm, the high rate of school-leavers reduced and the barriers for children from immigrant backgrounds lowered.

Family policy should be adapted to better accommodate family life and full-time employment.

At the same time, family policy should be adapted to better accommodate family life and full-time employment. The expansion of public child-care facilities should be continued but the benefits for caring for children at home abolished. This is because home-based benefits deprive children from socially disadvantaged and immigrant households in particular from the linguistic and social skills communicated in child-care facilities.

The German tax policy of pooling and dividing income equally between a married couple has been proven to give the wife, usually the secondary wage earner, an incentive to seek only part-time work, irrespective of qualifications. As such, this form of taxation should be replaced by a true separation. This would be cheaper and associated with fewer negative work incentives.

If you compare the need to reform with the 1970s and cuts of 2010, it should be easy to introduce a 2020 growth package. There would be little danger of Chancellor Angela Merkel being penalized for it by the voters as her predecessor Gerhard Schröder once was. And she would have the chance to go down in the history books as a great chancellor.


The author is the president of the Handelsblatt Research Institute. To contact the author: [email protected]